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Economies of scale
In , economies of scale are the cost advantages that enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale. (In economics, "economies" is synonym to cost savings and "scale" is synonymous with quantity or the scale of production.) Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or manufacturing unit, plant or an entire enterprise. When average costs start falling as output increases, then economies of scale are occurring. If a firm's of producing a good or service is beneath its of producing that good or service, then the firm is experiencing economies of scale. Some economies of scale, such as capital cost of manufacturing facilities and friction loss of transportation and industrial equipment, have a . Another source of scale economies is the possibility of purchasing inputs at a lower per-unit cost when they are purchased in large quantities. The economic concept dates back to and the idea of obtaining larger production returns through the use of division of labor. are the opposite. Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to increase. Common limits include exceeding the nearby raw material supply, such as wood in the lumber, . A common limit for low cost per unit weight commodities is saturating the regional market, thus having to ship product uneconomic distances. Other limits include using energy less efficiently or having a higher defect rate. Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades frequently. They will therefore avoid specialty grades even though they have higher margins. Often smaller (usually older) manufacturing facilities remain viable by changing from commodity grade production to specialty products. Overview The simple meaning of economies of scale is doing things more efficiently with increasing size or speed of operation. Economies of scale often rely on s, which are constant and don't vary with output, and s, which can be affected with the amount of output. In wholesale and retail distribution, increasing the speed of operations, such as order fulfillment, lowers the cost of both fixed and . Other common sources of economies of scale are (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower- charges when borrowing from banks and having access to a greater range of financial instruments), (spreading the cost of advertising over a greater range of output in s), and technological (taking advantage of in the production function). Each of these factors reduces the s (LRAC) of production by shifting the down and to the right. Economies of scale is a practical concept that may explain real-world phenomena such as patterns of international trade or the number of firms in a market. The exploitation of economies of scale helps explain why companies grow large in some industries. It is also a justification for policies, since some economies of scale may require a larger market than is possible within a particular country—for example, it would not be efficient for to have its own carmaker if they only sold to their local market. A lone carmaker may be profitable, but even more so if they exported cars to global markets in addition to selling to the local market. Economies of scale also play a role in a " ". There is a distinction between two types of economies of scale: internal and external. An industry that exhibits an internal economy of scale is one where the costs of production fall when the number of firms in the industry drops, but the remaining firms increase their production to match previous levels. Conversely, an industry exhibits an external economy of scale when costs drop due to the introduction of more firms, thus allowing for more efficient use of specialized services and machinery. The management thinker and translator of the for service, Professor , argues that attempting to create economies by increasing scale is powered by myth in the service sector. Instead, he believes that economies will come from improving the flow of a service, from the first receipt of a customer’s demand to the eventual satisfaction of that demand. In trying to manage and reduce unit costs, firms often raise total costs by creating . Seddon claims that arguments for an economy of scale are a mix of (a) the plausibly obvious and (b) a little hard data, brought together to produce two broad assertions, for which there is little hard factual evidence. References Category:Monetary system